Police in Nepal have arrested a legislator for allegedly masterminding a bomb attack that killed four people and injured dozens in 2012, police have said.

Sanjay Kumar Sah, a former government minister, was arrested late on Saturday over the attack targeting 150 protesters rallying in the southern city of Janakpur, 20km from the Indian border.

"We have strong evidence that Sah planned the attack," district police official Uttam Subedi told the AFP news agency on Monday.

Police accuse Sah of holding a personal grudge against one of the protest leaders who escaped unharmed when the bomb strapped to a motorbike exploded in April 2012, killing four and injuring nearly 30 others.

Both men are accused of using armed gangs to secure lucrative real estate contracts.

At least two other people, including Sah's aide, have also been arrested over the blast, which hit protesters campaigning for a separate province for the Maithili-speaking minority in Nepal's southern plains.

"Their statements revealed Sah's role in the attack. We now have phone and transaction records to back their claims," Subedi said.

A trial against Sah, from the regional Sadbhawana Party, is under way following his arrest in the border town of Birgunj for allegedly plotting the attack.

Nepal has been relatively peaceful since former rebel Maoists laid down arms after waging a 10-year rebellion and signed a peace accord in 2006, paving the way for the country's first post-war polls two years later.

The Maoists won the 2008 Constituent Assembly elections, but the parliament was deadlocked over plans to draft a constitution.

Sushil Koirala, the head of the centrist Nepali Congress party, became prime minister in February after his party secured the most seats in the country's Constituent Assembly polls in November.